Sunday, February 22, 2009

Our Share The Wealth Charlatans

I just finished re-reading Henry Hazlitt's "Economics in One Lesson". The book is timeless, and except for the style of writing, one would think that it was written as a commentary on the many problems we face today. Have a look, and you'll find the real solutions to our economic woes aren't the ones that are being offered today.

It exposes our politicians as the "Share the Wealth Charlatans" they truly are. Their latest endeavor to conjure up greater demand in the economy with wasteful spending, under the guise of stimulus, is a prime example. A massive, yet ineffective spending bill produced in haste at a critical point in our economy, when what we truly need are economic policies that are Pro-Growth. Governments don't create jobs, only expanding economies do.

According to the author, politicians don't understand that Supply and Demand are two sides of the same coin, and that it is Supply that creates Demand! The author correctly states, "The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want".

What our economy needs to do now is expand. In order for that to happen we need to provide incentives for existing businesses to increase production, and for entrepreneurs to start and grow new enterprises. The benefits of Employment always beat unemployment benefits hands down. Sadly, there is next to nothing in this largest ever government plan that could possibly be seen as encouraging business to expand production and hire additional employees. The key to this economic recovery, as all others before it, will only be found on the Supply Side of the equation.

Are we supposed to believe that in a trillion dollar stimulus bill there was no room at all to reduce marginal tax rates on individuals and corporations in order to reward their hard work and efforts? The same folks who scream that wages for the middle class have not risen fail to make the connection that it is greater capital investment driving productivity that allows wages to rise. These class warriors see the capital gains tax as a club with which to pummel the employer class for it's success. Yet it is the very workers they claim to represent who take a beating when investors refuse to risk their capital, because the rules have been stacked against them. Less capital equals lower productivity, stifling both job creation and wage increases. No Pro Growth policies allowed, just isn't a winning slogan!

Another theme developed in the book is the propensity of politicians to speak to only one side of an argument. They speak only of the positive effects their legislation will have on the group that they are currying favor with. Never do they address the effects their program will have on the rest of us. We have been told over and over again how the stimulus package will save jobs for teachers, firemen, police officers and state workers, yet I don't recall the President ever mentioning the CBO's warning that the spending bill would negatively impact the economy and the rest of us for years to come. The cost side is what you never hear about. Yes, we all know what the price of the stimulus bill is, a $1 trillion dollars give or take. There is precious little discussion, however, about the real cost to our economy that diverting this enormous amount of capital, which otherwise would have been allocated towards profitable endeavors by the free market. Instead, it will now be directed by politicians with an eye on reelection.

We now have another new program to bailout people who are not in foreclosure, but who soon might be? The same one- sided scare tactics are being used to help try and sell it. We are now being told that if even one home in your neighborhood goes into foreclosure, it will reduce the value of every other home in that neighborhood. With the failure rate of these types of programs near 60%, what is their point? Better yet, what is the other side of the argument that we are not hearing? Person A lent money to Person B , who freely entered into a transaction to benefit himself. Person B now is unhappy with the outcome of his transaction, and wants to renegotiate. It's a little late, don't ya think? The government wants to enable judges to cram down mortgages, which simply means that person B pays Person A back less than what he borrowed and at a reduced rate of interest. If this wasn't sad it would be funny, because it is being done at the same time banks are being excoriated for not lending! Can you blame them?

A very elementary idea that our politicians have forgotten, or more likely never learned is the following: One occupation can expand only at the expense of all the others! They never reflect on the idea that their government directed spending plans can only occur by denying existing industries and start up enterprises the capital and labor needed for them to expand or begin production.

We have come through a period of time characterized by the love of one's house, but has McMansion mania increased prosperity? Apparently not, or the problems we face today would not be joblessness and foreclosure. Why then does the government continue to direct additional resources to a sector of the economy that has already seen massive over- investment? If "investing" in our houses were truly the path to prosperity, we should be in economic nirvana considering the vast resources that have been poured into creating more and bigger homes over this past decade. I think rather than additional programs to aid housing in the hopes that it will lead us out of this recession, it's time to toss in the towel and admit what a terrible failure the government subsidization of home ownership has been.

The government cannot change the laws of economics. Home prices will continue to fall until they reach a market clearing level, with or without these unworkable government handouts. If we let the market work, we will be out of this mess sooner rather than later, and without the massive amounts of additional debt these programs will entail.